Moody’s: Only serious reform can improve C rating for Lebanon

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Moody’s: Only serious reform can improve C rating for Lebanon

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(The Daily Star)-28/01/2021

Rating agency Moody’s maintained its C rating for Lebanon to reflect the county’s failure to find a solution for the mounting losses for the bondholders and implement needed reforms.

“The C rating reflects our assessment that the losses incurred by bondholders through Lebanon’s current default are likely to exceed 65 percent. The country is steeped in an economic, financial and social crisis, which very weak institutions and governance strength appear unable to address,” Moody’s said in its report on Lebanon.

It added that the collapse of the currency in the parallel market and the concomitant surge in inflation fuel a highly unstable environment, noting that in the absence of key steps toward plausible economic and fiscal policy reform, official external funding support to accompany a government debt restructuring remains elusive.

Moody’s declined to give an outlook of Lebanon at this stage and stressed that C is the lowest rating in its rating scale.

“The decision not to assign an outlook to the rating is based on the very high likelihood of significant losses for private creditors and the fact that C is the lowest rating in our rating scale,” it added.

“If there are any upward movements in Lebanon’s sovereign rating after the debt restructuring, they are likely to be limited for a considerable period of time. It is unlikely Lebanon’s rating would move from its current position before restructuring, given the extent of the macroeconomic, financial and social challenges, and our expectation of very significant losses,” it added.

The agency reiterated that if Lebanon aims to improve its rating then it must speed up fiscal consolidation and reforms.

“For Lebanon’s issuer rating to increase above levels associated with very high probability of future re-default and significant losses, the implied pace of fiscal consolidation and structural reform implementation would have to be much faster than currently expected, over a number of years,” it added.

Moody’s also said that a further precondition for a substantial upgrade is that the key drivers of the country’s debt dynamics — such as economic growth, interest rates, privatization revenue, and the ability to generate and sustain large primary surpluses — were to evolve in a way that would ensure debt sustainability in the future.

“Lebanon’s b3 economic strength score reflects the country’s small size, weak growth potential and eroded competitiveness. Remittances and transfers from abroad have traditionally fueled activity in the real estate, construction and financial sectors.”